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Model Portfolios for January 2013

By: Tom Madell | Friday, January 4, 2013

Now that 2012 has come and gone, we can confidently pass judgment on how long-term
investors in both stock and bond funds/ETFs have fared. And, likely, for most,
there has been a myriad of opportunities to be successful - the S&P 500
Index returned 16%, while quality bond funds generally returned between 2
and 15%. But more importantly, I will focus on how I recommend investors might
set up a Model Portfolio for the year ahead.

In short, it has been almost nothing short of a terrific year for long-term
investors. Of course, there were, as always, short-term considerations that
might have suggested not staying invested to the maximum of one's "ideal" asset
allocation, which for many people could be as easy as constructing, and continuing
to maintain, a simple 60/40% split between stocks and bonds.

No matter how many times it's been said before, however, many people still
ignore the dictum of "don't try to time the markets" (and, I would add, try
to outguess how it may react to specific events). Otherwise, every time something
might arise such as the now infamous "fiscal cliff," some market followers
will choose to adhere to conventional thinking and use the event as an excuse
to either pull back from existing investments or merely sit on the sidelines,
afraid to invest.

Of course, scary events can indeed impact the markets, reinforcing the belief
that market timing can be successful. But such fear-induced drops are usually
short-lived, with not much accomplished for the pulled-back or pulled-out
investor. Realistically, unless you are willing to become a trader focusing
on these relatively short-term down (or up) movements, the investor who attempts
to sidestep potential potholes will more than likely be missing out when the
blip disappears, as it so often does.

Such up and down movements of stocks and bonds can often mask the bigger picture.
For example, try to suppose you had never heard of the term "fiscal cliff" along
with its potential for a big downdraft for the stock market. If the fearful
premise had proven correct, surely you would now be able to recognize its
existence in the following five year graph of the S&P 500 Index:

There have been a few drops big enough to stand out over the past five years
but the effect of the fiscal cliff over the period is not one of them. In
fact, the S&P 500 instead rose over 5% between Nov. 15th and year end,
a period of high drama for the fiscal cliff negotiations.

Of course, some may argue that when events such as the fiscal cliff seem to
be dominant, they are not trying to time the market, just to be prudent in
the face of the real possibility of losses. But, in truth, whenever one tries
to jump out, jump in, avoid the market, or embrace it based on events that
are likely be a factor for perhaps only 6 months or less, they may risk missing
the bigger picture which frequently dominates an investment cycle, lasting
from anywhere between 1 and 5 years, or even more.

So clearly, long-term investors should feel good about where they are at the
start of 2013 in spite of having just traveled down what might have appeared
from a shorter-term perspective as a treacherous course. It all seems to suggest
that investors should mainly focus on picking quality funds from undervalued
categories, rather than being influenced by the vagaries of public opinion,
fears stirred up by politicians and even some economists, as well as overly
simplified predictions of where stocks and/or bonds may be headed.

With this in mind, let's turn to what my research now suggests are good choices
looking forward.

Allocations to Stocks, Bonds, and Cash

My overall allocations to stocks, bonds, and cash remain unchanged from last
quarter. However, there are some significant changes in my recommended allocations
to specific funds to reflect changing prospects for specific stock and bond
categories which we feel offer the best prospects going forward.

For Moderate Risk Investors

Asset

Current (Last Qtr.)

Stocks

67.5% (67.5%)

Bonds

27.5 (27.5)

Cash

5 (5)

For Aggressive Risk Investors

Asset

Current (Last Qtr.)

Stocks

85% (85%)

Bonds

10 (10)

Cash

5 (5)

For Conservative Investors

Asset

Current (Last Qtr.)

Stocks

47.5% (47.5%)

Bonds

45 (45)

Cash

7.5 (7.5)

Model Stock Fund Portfolio

The most significant change from our 4th quarter Model Portfolios is a somewhat
lesser emphasis on funds/ETFs with either a Growth or a Small/Mid-Cap orientation,
and, an increase in our International allocation. While there is no fundamental
reason to expect the two former categories to do less well than before, we
simply think the remaining categories in the portfolio are currently showing
better prospects, especially our International choices, than the two with
lowered allocations.

Notes: 1. TBGVX is currently one of our
favorite managed funds (see Dec. 2011 for details)
2. VWIGX provides a moderate allocation to Emerging markets and to Asia, areas
we expect to do well in 2013.
3. The European region is highly undervalued; PEUYX has done better than Vanguard
Europe and has been more tax-efficient.

Model Bond Fund Portfolio

We continue to expect subdued returns for "traditional" bond funds and therefore
recommend continuing to invest in funds that have a better chance of doing
well than funds which customarily invest in treasuries, mortgage, or short-term
bonds.

Mutual Fund Research Newsletter is a free newsletter which began publication
in 1999. It has become one of the most popular mutual fund newsletters on
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News and Media Newsletter websites. Tom Madell, the Publisher, is a researcher
and writer, as well as a long-term investor, whose investing articles have
appeared on hundreds of websites, including the Wall Street Journal and USA
Today, Morningstar, and in the international media.

Since we began publishing our Newsletter's quarterly Model Portfolios, the
great majority of our Stock Portfolios have outperformed the S&P 500 Index
over the following year, 3 years, and 5 years. Ours is one of the most consistent
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The site is unique in that it takes an empirical, technical analysis approach
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